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Ripple Just Announced a Partnership With This Major Central Bank

Believe it or not, this is Ripple's second pilot project with a central bank.

Last year, cryptocurrencies could seemingly do no wrong. Having begun the year with a market cap of just $17.7 billion, the aggregate value of all digital currencies catapulted higher to end the year at $613 billion. This single-year gain of around 3,300% may very well represent the best performance we'll ever witness from an asset class over 12 months.

Catalysts for the cryptocurrency space seemingly came out of the woodwork in 2017. News-driven events played a key role in pushing bitcoin, the world's most valuable cryptocurrency, and its peers, considerably higher. For instance, Japan began accepting bitcoin as a recognized form of tender in June of last year, while the CME Group and CBOE Global Markets both introduced bitcoin futures trading to their platforms in December. These actions all helped to validate bitcoin's rise as a new asset class in investors' eyes.

Aside from news-driven events, a weaker dollar and retail investors' emotions were also responsible in some way for pushing cryptocurrency market caps higher.

Image source: Getty Images.

Blockchain is the main catalyst of the crypto revolution

But if there were a catalyst that stood head and shoulders above the rest, it was the rise of blockchain technology. Blockchain is the digital, distributed, and decentralized ledger that underlies virtual currencies and is responsible for recording all transactions without the need for a financial intermediary.

The emergence of blockchain is expected to have its greatest impact on the financial services industry. Transactions processed via blockchain are expected to be proofed and validated in a matter of seconds, even in cross-border situations, which is a far cry from the days it can take to validate a payment with the current banking system. Likewise, without any bank involvement as a third party during a transaction, fees are expected to drop, which could be beneficial to both consumers and businesses.

Blockchain is believed to offer plenty of advantages to noncurrency businesses, too. For example, blockchain could be used by logistics companies to transparently track products in real time, while retailers could take things a step further and examine the quality control testing of shipped goods. Blockchain is also being tinkered with as a new form of decentralized digital identification. The possibilities at this point are innumerable.

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Move over, bitcoin: Ripple's network is running circles around you

Yet, in spite of bitcoin's first-to-market advantage, its network isn't exactly the cream of the crop. In fact, its popularity and inability to reach consensus in its efforts to improve network speed have left it eating its competitors' dust. An average bitcoin transaction now takes longer than an hour to process and settle, with an average cost of $28, which is essentially on par with a bank wire transfer.

At the other end of the spectrum, one of the real blockchain standouts for both processing speed and transaction fees (i.e., low fees) is Ripple. A recently published analysis from HowMuch.net suggests that Ripple can handle up to 1,500 transactions per second, which is more than 200 times higher than bitcoin. Ripple also touts a transaction fee that's just a fraction of a cent. If Ripple's network can be scaled without adversely impacting its performance, and new hardware can be introduced to make its transaction speeds even quicker, it could have an opportunity to really disrupt the traditional payment industries.

In fact, Ripple has already secured two major financial partnerships. In mid-November, it announced a deal with American Express(NYSE:AXP) and Banco Santander(NYSE:SAN) whereby American Express customers in the U.S. could send noncard payments to U.K. Santander accounts via AmEx's FX International Payment network and have them ultimately process through Ripple's blockchain. The settlement was expected to be virtually instantaneous.

More recently, in January, Ripple and money transfer service MoneyGram International(NASDAQ:MGI) partnered on a cross-border payment project designed to use Ripple's XRP coins. Imagine for a moment that someone in the U.S. wanted to send money to someone in Mexico. Under this project, MoneyGram could convert the U.S. dollars into XRP coins, then convert those XRP coins into pesos. Meanwhile, this transfer could occur within a matter of seconds and cost just fractions of a cent. It's very exciting stuff that could give Ripple's partners a market advantage over their peers if the technology proves scalable.

Image source: Getty Images.

Ripple partners with a central bank... again

But for all of Ripple's partnerships, none may be more exciting than the Valentine's Day announcement that it had partnered with the Saudi Arabian Monetary Authority (SAMA) -- the central bank for the Kingdom of Saudi Arabia (KSA) -- to test instant cross-border payments over blockchain among domestic banks in the region. Believe it or not, this isn't the first time Ripple has tested its blockchain with a central bank. In 2017, Ripple successfully completed a proof of concept with the Bank of England.

According to the press release, this pilot program will use Ripple's xCurrent to provide for transparent, cheap, and extremely quick, cross-border payments. It also allows Saudi Arabia's central bank the ability to transform how it sends money globally. By piloting this program, the KSA has access to all of the banks and payment providers already on RippleNet, which can expand the pilot's reach into new corridors.

Saudi banks that are interested in testing out Ripple's blockchain technology will receive program management and training from SAMA. Said Dilip Rao, global head of infrastructure innovation at Ripple:

Central banks around the world are leaning into blockchain technology in recognition of how it can transform cross-border payments, resulting in lower barriers to trade and commerce for both corporates and consumers. SAMA is leading the charge as the first central bank to provide resources to domestic banks that want to enable instant payments using Ripple's innovative blockchain solution.

Image source: Getty Images.

Keep in mind there are concerns with Ripple's blockchain

However, smart investors should also understand that Ripple's blockchain isn't exactly running away from the competition. It faces no shortage of questions and concerns, despite snagging some impressive partners.

Chief among those worries is whether businesses will move beyond simply testing blockchain in small-scale and pilot projects and implement it in larger-scale, real-world situations. One of the biggest Catch-22s of blockchain is that no businesses seem willing to commit until scalability has been demonstrated. However, scalability can't be demonstrated until businesses try the equipment in real-world scenarios and commit to it. Until we move beyond demos, it's tough to value how much this technology is actually worth.

It's also worth pointing out that the barrier to entry among blockchain developers is extremely low. It doesn't take anything more than time, money, and a team of developers who can write computer code to develop blockchain and a tethered cryptocurrency. Essentially, it means that today's top blockchain projects could be obsolete in no time.

Ripple also can't discount the possibility of being outdone by the banks themselves. A number of financial institutions have been developing their own proprietary blockchain networks, some of which work independently of a tethered cryptocurrency.

In other words, while Ripple has an exciting blockchain solution now, it's far from being the only fish in the sea. Swim with caution, my friends.

Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool recommends American Express, Cboe Global Markets, and CME Group, but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong